Oct. 23, 24: Guest Steve Sanders

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Participants on Oct. 23 included host Brenda Buttner, Jim Cramer, Herb Greenberg, Eric Moskowitz, Dan Colarusso, Gary B. Smith, Dagen McDowell, Dave Kansas, and guest Steve Sanders. The transcript is unedited and phonetic spellings are indicated with a (ph).

BRENDA BUTTNER, HOST, THESTREET.COM:

Hi, everyone. I'm Brenda Buttner. And you are connected to THESTREET.COM. Let's get going shall we with "The Word on TheStreet."

With us from THESTREET.COM financial news Web site Senior Columnist Herb Greenberg, Editor-in-Chief Dave Kansas and Senior Writer Eric Moskowitz.

We will also hear from Jim Cramer in just a couple of minutes.

Gentlemen, what a week, huh? Let's try to figure out what happened so we can get a handle on what Monday morning's opening bell will bring.

Now the week before the last, the Dow lost a record 630 points. This past week the Dow regained 450 points.

Herb, what is the market reacting to that one day it's so bearish and the next day it's so bullish?

HERB GREENBERG, THESTREET.COM:

Well, haven't you heard the word?

(LAUGHTER)

A correction...

BUTTNER:

Give it to us.

GREENBERG:

We had a correction and the correction is over. And IBM had such terrible news. And we got that out of the way and we have no more inflationary news, at least that's...

DAVE KANSAS, THESTREET.COM:

But Herb, Herb you're suddenly very upbeat I would say...

GREENBERG:

Oh, come on...

BUTTNER:

He's sitting in Cramer's chair. That's what's happened.

(LAUGHTER)

GREENBERG:

Oh, it rubs off. Can't you hear that sarcasm dripping off my voice...

BUTTNER:

Yes...

ERIC MOSKOWITZ, THESTREET.COM:

Herb, during this earning ...

BUTTNER:

...so, it's not a bottom.

MOSKOWITZ:

...during this earning season, even if you mention Y2K, you lose 10 points immediately. So, and the earning season is not done.

So, we're not...

GREENBERG:

You know, you know you're talking about...

MOSKOWITZ:

...out of the woods yet.

GREENBERG:

...the IBM (IBM:NYSE) issue with Y2K and what I bet you're going to start seeing now is companies blaming Y2K, using it as an excuse...

MOSKOWITZ:

To hide other problems.

GREENBERG:

You've got it.

BUTTNER:

The IBM Issue of course being that that stock just cratered when it announced that it was going to have a couple of bad quarters.

Is it a buy now? What do your sources say?

MOSKOWITZ:

Not quite a buy. It's going to be dead money. I think it did a little bit of a dead cat bounce yesterday. It's gone up a couple of points. I mean when you fall, what, 22 points in about a day-and-a-half, including after market, you're going to get a little bit of a pop.

But this stock is still in trouble.

GREENBERG:

You think in trouble going down. You know, I was thinking you know this company ultimately, this is -- if this is just a short-term event, why wouldn't somebody buy that stock down here?

MOSKOWITZ:

When you're giving at outlook like your next two quarters are going to be worse than your last year's two quarters, that's not a good sign in terms of outlook.

BUTTNER:

Well, it's clear that the market certainly moves on earnings news, or what it thinks will be earnings news, often reacting to speculation before earnings are even announced.

Jim Cramer says if you're paying attention that spells opportunity. You have the chance to make money.

Take a look.

JIM CRAMER, THESTREET.COM:

We're smack in the middle of earnings season. Earnings season is a lot of opportunity. Because a lot of companies' stocks trade down right before the quarter. You have a high company that you really like, that's your opportunity. That's the one-day sale that the stock market puts on because everybody is so jittery.

Hoping last week if you had done it -- Microsoft (MSFT:NASDAQ). Right here -- Microsoft going down 10 straight points ahead of this quarter. Everybody is so worried, so nervous.

What an opportunity. It goes up 6 on a decent quarter. You had a great moment to get in because the risk is diminished when the stock is down ahead of the quarter. The same things is true the other way though.

If a stock has run up big, ahead of when they're about to report their earnings, I wouldn't hang around. I would let some go. I would sell some of that stock because now you've got maximum risk.

If something goes wrong, the stock gets hammered.

Now, most companies right before they report the quarter, do nothing. Sometimes though they get hammered because people are really worried that's something that's going wrong.

That's what happened with Microsoft. Nothing was wrong. It was just another opportunity to buy Microsoft more cheaply than it had been for weeks. And that's an opportunity you've got to take advantage of.

BUTTNER:

You know I think it's terrific that Cramer had the foresight to recognize that a dip was a dip and not a downward trend. But the truth is sometimes these stocks are just buys, that you shouldn't put it off to a so-called dip.

That when Microsoft -- if you had bought it at the high two years ago, you would be up 150%.

KANSAS:

I mean the thing to think about here Brenda is that Jim gives a great illustration using basically just a great company.

BUTTNER:

Right.

KANSAS:

I mean whenever Microsoft goes down whether it's right before the earnings, right before Halloween, right before Christmas -- whatever it is -- it seems to bounce back. That's been true for the last number of years. But the fact of the matter is, is you should look at what is a good company.

You shouldn't say like, "Gee, it's going down ahead of the earnings" or "Gee, it's going up ahead of the earnings." You need to look if it's a good company. And the fact is Microsoft -- a good company.

So, that's the reason to be thinking about buying Microsoft when it dips down like that.

BUTTNER:

Another one that dipped down -- Gillette (G:NYSE). What do we think about that one?

KANSAS:

What do you think? ...

BUTTNER:

You've been covering that one for awhile Mr....

GREENBERG:

Oh, Gillette. They can't sell enough of those Mach-3s. I think -- I think Gillette is an example of a company that had been aggressive with the accounting. And this comes down to this whole thing.

Jim talks earnings, earnings, earnings. And earning season. But you still have to come down to the fundamentals of the company. And in the case of Gillette if you believed it because Warren Buffet owns it, you would have had your head handed to you.

In other words, you have to know what you own. And the earnings season isn't the only reason to buy or sell something unless you're a trader.

KANSAS:

Absolutely -- Eric, I mean Herb, the thing I'm thinking about here with Gillette, it shows how important the actually accounting aspects have become in all these earnings stuff. Every one is PE, all these different ratios related to earnings. And the fact of the matter is that the accountants have become so -- I don't know if they've become lazy or they're not really looking at the numbers the way they need to be looked at -- but the earnings sometimes just can't be trusted. And we're seeing it more and more.

GREENBERG:

And I think that people are going to start paying attention to this accounting issue. It's starting to rear its head. And no one ever -- you know all they ever wanted was earnings, earnings, earnings. But now what's the quality of those earnings. And that's what people have to start paying attention to.

BUTTNER:

Quickly for next week earnings, any standouts?

KANSAS:

Well, I think the market is going to be looking to see how real this financial rally has been. And any indication from the financial sector, earnings looking ahead, I think if this has legs, Glass-Steagall bound rally for the financials, that's going to be the real key.

MOSKOWITZ:

And Compaq (CPQ:NYSE) will be an interesting call on Tuesday.

GREENBERG:

Ooooh...

BUTTNER:

Always.

(LAUGHTER)

MOSKOWITZ:

So, keep your ears tuned to that one.

BUTTNER:

OK, guys thanks for giving us the word on THE STREET this week.

But there is still lots more to come.

Up next, odds are that you have -- if you have any investments at all, you probably own this mutual fund. But does Fidelity Magellan (FMAGX) still deserve to be in your portfolio?

You're going to need to hear this, next, on THESTREET.COM.

BUTTNER:

Welcome back.

You know we just talked about how earnings season is so crucial to the stock market. But we've got someone here who doesn't pay much attention to earnings reports and the like. He says the chart tells all.

Here's the Chartman.

That's Gary B. Smith who trades for a living from his home using the charting method. Gary joins us, as always, from Washington, D.C.

And filling in for Adam Lashinsky, THESTREET.COM's mutual fund reporter Dagen McDowell.

Welcome to both of you.

DAGEN MCDOWELL, THESTREET.COM:

You're welcome.

GARY B. SMITH, THESTREET.COM:

Hello, Brenda.

BUTTNER:

Well, Gary just for Dagen, you turned your charting charms on mutual funds instead of stocks today, and charted the mother of all funds, Fidelity's humongous Magellan, which you actually own in a retirement account.

So, what do you see on that chart?

SMITH:

Well, Brenda I know for a fact that you are a movie lover. And have you ever sat through a movie where you're about five minutes into and you go, ah, I know how this is going end, and it's just not going to be a pretty sight. Maybe a horror film or something like that.

Look, I'm pulling for Fidelity. As you mentioned, I have money in it. But I've seen this money before. It's formed a big descending triangle. It's found support all along that 120 level but it keeps hitting it on the downside.

My fear is that it's going to burst through the 120 level, and if it does -- and there's no guarantee that it will, but if it does, I think it's going to go down another 10%.

And at the end of this movie there is going to be a lynch mob like in those horror films, only they're going to be yelling for Peter Lynch to come back and run Fidelity.

BUTTNER:

Dagen, I'm not so sure. I mean current manager Bob Stansky may not be as well known as Peter Lynch, but he's quite a job in the past few years hasn't he?

MCDOWELL:

Right. I mean Bob Stansky has proved that -- I mean that he can manage this mammoth fund. But I do think that at $92 billion, this fund is still way too big.

I mean if the market starts to move to smaller cap stocks, there is no way that this fund is going to be able to capitalize on opportunities in that part of the market.

It's a super-large cap fund. I mean if you look at the market cap of this fund, and the sector weightings, it looks like an index fund. So, if it looks like an index fund, then buy an index fund. It's cheaper and with the S&P 500 fund, you know exactly what stocks you own.

BUTTNER:

OK, Gary, take on the only manager to beat the market for nearly the past decade -- Bill Miller and his Legg Mason Values -- Value Trust (LMVTX). Neither you or Dagen own it, but what does the chart say about this one?

SMITH:

Yeah, well, you know I say "value-schmalue" on this one.

(LAUGHTER)

You know, I'm looking at the chart and I figure what is valuable about this is their -- what is in this fund would be my question. I -- I tend to think Cramer's Red Hot index makes up this fund. Strike that comment.

This fund would be doing better if it had Cramer's Red Hot index in it. This is on a death spiral downward. I can see zero redeeming value here. And I do make the pun there with value.

BUTTNER:

Dagen, Bill Miller has quite a record. He's certainly no stranger to double digits, but this year he is struggling a bit after tough second and third quarters.

MCDOWELL:

He is struggling but, Gary B., I can't believe that you would write off arguably the best fund manager of this decade based on a chart of a few months.

(LAUGHTER)

SMITH:

(OFF-MIKE)

MCDOWELL:

I can't believe it. I mean if you're going to buy an actively managed fund, you want a great fund manager, and Bill Miller is the man.

He -- since 1990 this fund has beat the S&P 500 every year. And not only that beneath those great performance numbers, he knows how to pick incredible stocks -- AOL (AOL:NYSE) and Dell (DELL:NASDAQ) are two of the ones I can think of.

BUTTNER:

OK, Gary...

SMITH:

Well, do I get one more comment?

BUTTNER:

Yes, always, Gary, jump right in.

SMITH:

All right, I look at the chart obviously, Dagen, but what I see here is a man resting on his laurels. Quite frankly, if you're resting on his laurels, I think you're going to be losing money with this Legg Value Fund. I think you should really look for something else.

In fact, at this point, the Fidelity Fund is a better buy.

MCDOWELL:

But you got to -- you gotta look at the long term performance of that fund. I mean Bill Miller buys stocks and holds them for seven to 10 years and ...

SMITH:

Well...

MCDOWELL:

...I think fund investors should be willing to hold this fund for at least that long.

SMITH:

Well, you're going to be riding down a pretty good dip here I think that...

MCDOWELL:

But he will bring you back, Gary...

SMITH:

We shall see.

BUTTNER:

Thanks so much.

Up next, our guest money manager says Wal-Mart (WMT:NYSE) is a great place to shop and an even better stock to own.

But what happens when Wal-Mart does the Stock Drill? We will put it to the test next.

BUTTNER:

Welcome back.

Well, it's time for Stock Drill.

Our guest stock picker today is Steve Sanders, President of MDL Capital Management. The firm's large-growth equity fund is ahead of the S&P 500 so far this year. The stocks Steve likes today are among the fund's top holdings -- Wal-Mart, Pfizer (PFE:NYSE) and Citigroup (C:NYSE). And here to get the answers you need before investing your own money in those stocks, from THESTREET.COM Herb Greenberg, and editor Dan Colarusso. Neither Herb not Dan owns any of the stocks that we are talking about.

Steve, thanks so much for joining us.

STEVE SANDERS, MDL CAPITAL MANAGEMENT:

Good to be here.

BUTTNER:

Well, let's start off the list with the world's largest retailer, Wal-Mart.

SANDERS:

I lot of people...

BUTTNER:

But is the stock really a bargain? It's at a 52-week high.

SANDERS:

Yeah, I think going long term, or you look over the next three to five years it's a bargain for a number of reasons. Yes, it's grown by about 25% over the last two years. And that's a consecutive growth rate.

But when you look at how they're really structuring the stores right now, particularly moving towards this supermarket center that they sort of call it a mix of grocery story and a discount store, this is where they feel most of the growth is going to come from in the future.

GREENBERG:

Steve, you know there is one issue going on here, and that is unions are going after Wal-Mart around the country, and this is causing them to stop opening certain big super stores.

But the issue is they have one unionized store. What happens if more of these stores become unionized?

SANDERS:

Yes, you can definitely see an impact to the bottom line from a negative perspective, it's going to affect wages.

They have been fighting this battle for a while. The other battle that they began to fight once they -- began to fight once they moved out of the South, and in the Midwest was, this whole idea of you're closing down stores by opening up a store in our neighborhood. And people didn't like that.

But they've been able to overcome that so far.

DAN COLARUSSO, THESTREET.COM:

So, they've been able to overcome that. Will they be able to overcome that as they move more to supermarket type things? Can they -- can they do food the same way they've done everything else?

SANDERS:

So far, yes. So far it looks like they're doing food pretty well. That's why you see a 30% year-over-year growth in these supermarket, or supercenter types of stores. And they're going - - they're at about 713 of those stores. They want to grow those to about 1,300 or 1,400 by the year 2003. They're putting their money here.

BUTTNER:

Steve, drug make Pfizer (PFE:NYSE)-- now it's had product problems. It's antimigraine drug has been delayed.

Make your case.

SANDERS:

Well, we like Pfizer particularly when we look at it from a thematic approach that we've got this huge thing -- trend -- taking place in the U.S. economy and that's the aging of the population. The number of 65-year-olds are going to grow huge between now and the year 2015. And these people need medical devices. They also need drugs, pharmaceutical drugs...

COLARUSSO:

OK. But with Pfizer, I mean their drugs are out. I mean their pipeline is not exactly brimming with new products. They had to move two products back. They're in a situation where they're going to have to make money by cutting costs and managing things. It's becoming more expensive than ever to buy drugs -- to sell drugs.

Why are we -- why do we want to be involved in this stock?

SANDERS:

Well, because when you look at Pfizer, I know that they had a lot of their pipeline come through over the last three years with Viagra and a few others. And a lot of people say can you really duplicate bathe success of Viagra?

Well, they have spent a lot of money on research. They're actually behind Merck (MRK:NYSE) in terms of spending on research and development. And their main concern is filling up the pipeline.

So, when we do look at their pipeline about three years from now, it begins to fill up again and bodes well for a lot of opportunities for new drugs.

COLARUSSO:

But what can that cost them, I guess.

SANDERS:

Yeah, they're putting the cost in now. They recognize and understand from a management perspective this is the name of the game and the drug -- in the pharmaceutical industry. Fill up that pipeline.

But what Pfizer has done very well also is that they have formed strategic alliances with other companies, with other drug manufacturers, and this has allowed them to really see this flow to their bottom line.

BUTTNER:

All right.

Jim Cramer has some strong opinions about drug makers, in particular Pfizer. Let's hear what he has to say.

CRAMER:

Hey, Pfizer, you're talking my own portfolio here. I'm long the name. But let me ask you something, I think Merck, which I'm also long, has got more momentum than Pfizer. Why?

Should I stick with Pfizer instead of putting more money in Merck?

BUTTNER:

And it is at a more expensive premium as well.

SANDERS:

Yeah, it is. You're actually playing the industry when you're playing both of them. We own both Merck and Pfizer and what you want to do is catch the next Viagra, the next drug that's coming out. And they're the 800-pound guerrilla when it comes to marketing.

Pfizer is better at marketing their drugs than Merck is.

BUTTNER:

OK, quickly -- financial giant Citicorp, one of the financials that enjoyed some strong gains on Friday. What do you like?

SANDERS:

Yes, this week they had strong gains because of the legislation maybe repealing some of the Glass-Steagall Act which is going to allow insurance companies and banks and investment firms get into bed together, which is what Citibank did when they had the Travelers deal.

GREENBERG:

Well, you know one thing this company is, is a big credit card company in addition to every thing else. And the credit card issues stumped Bank One (ONE:NYSE) a few weeks ago, clobbered it. Why isn't that going to be an issue here?

SANDERS:

Well, number one, CitiBank is the largest credit card issuer. Number two, when you look at what has happened with interest rates over the last several years, interest rates have not declines on credit cards, but the amount of money that it costs the bank in order to this -- in other words the spread is greater for banks. And they're making out much better on the spread and off of the fees as well.

COLARUSSO:

Let's forget the credit cards. Let's look to a more important issue, I think leadership. Who is running this place? We have John Reed, we have Sandy Weill on TheStreet they're calling the group "sandy group" now. It's not Citigroup any more. It's "sandy group."

This power struggle with Sandy Weill hurt American Express (AXP:NYSE) years ago. It is going to have the same impact to Citigroup? How are these things going to be resolved?

SANDERS:

I think the corporate -- the culture struggle is still existing between those two organizations. And it will have some impact. You're going to see some additional layoffs.

Remember, a lot of people blew over this the fact that a couple of -- about a year or so ago, a couple of months ago, they announced that the head of the branch banking system will be the guy that runs the Primerica financial services arena, which was huge.

That means they're changing the banking system from the old stale branch system to more of a sales oriented process where they can do what -- move product, move product which is the name of the game in the financial services arena.

BUTTNER:

OK guys, got to go. Steve Sanders, from MDL Capital Management, thanks for doing the Drill today.

SANDERS:

Yes.

BUTTNER:

We will keep track of your picks to see how they do.

Herb and Dan, stick around because up next you guys are in the hot seat -- predictions right after this.

BUTTNER:

Welcome back.

Time for predictions.

Now, Jim Cramer isn't here in the studio, but I know this is hard to believe. He's still going to chime in.

Let's hear what he thinks is one the horizon.

CRAMER:

On THESTREET.COM, I write a lot about the Red Hot index. This is the index of the stocks that represent the favorites of the hot money crowd. Almost all of the stuff goes to the infrastructure, the plumbing of the Internet.

I think all the action is going to be in the Red Hots. That's going to be the hottest index for the next couple of weeks and that's where you have to be.

BUTTNER:

And by the way, there's a link so you can get the full list of what stocks are in the Red Hot index at thestreet.com/tv.

OK, Herb, what's coming up?

GREENBERG:

Mattel (MAT:NYSE) said they found no irregularities at its learning company subsidiary. I say they peel back more layers going forward. Goes from bad to worse.

BUTTNER:

More trouble. All right, Dan.

COLARUSSO:

I say forget this week. Options prices are showing that people are too complacent. I don't think they should be. I think they should be a little more worried. Look for a tough week next week.

BUTTNER:

Hmm, and Dave.

KANSAS:

Not so many worries. Fed is done moving. No rate move the rest of the year.

BUTTNER:

All right. That's definitive. All right, you can let us know what you think about those predictions. Just go to thestreet.com/tv. There is also a place there to send us your comments abut the show. So, let us know what you like and what else you would like to see?

And don't forget that you can get THESTREET.COM 24-hours a day, seven days a week by reading our Web site at THESTREET.COM.

Every day, all of us here and dozens of other reports and columnists write stories.

And we will see you again next week. Stay with us.

END

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